Norway Boosts Capital Requirements to Stem Banking Risk

Norway proposed raising capital
requirements at its banks to protect the economy from financial
losses amid warnings Europe’s second-richest economy is in the
grip of a housing bubble.

The country will target core capital requirements of 10
percent by July next year, up from the current 9 percent, the
Oslo-based Finance Ministry said today. For systemically
important banks, the target will rise to 11 percent in 2015 and
12 percent in 2016. A proposed counter-cyclical buffer of as
much as 2.5 percent could also be assessed, the ministry said.

“The international financial crisis has shown how
vulnerable banks are and how fast a loss of confidence can
spread,” Finance Minister Sigbjoern Johnsen said in the
statement.

Norway is trying to pad its banks against losses after
house prices doubled since 2002 and private debt burdens swelled
to a record. Lawmakers are moving ahead of international
regulators amid concern the oil-rich nation’s mortgage market
needs curbs to take effect earlier than implementation dates set
by the Basel Committee on Banking Supervision.

Norway, which like Switzerland isn’t a European Union
member, has required banks to hold common equity Tier 1 capital
of at least 9 percent of their risk-weighted assets. DNB ASA (DNB),
the largest bank, had capital of 10.5 percent at the end of last
year. Norwegian lenders had “a bit more” than 11 percent in
core capital at the end of last year, according to the ministry.

DNB slid 1.3 percent to 86.4 kroner as of 12:48 p.m. in
Oslo.

Risk Weights

Norway is also considering proposals that include tripling
risk weights assigned to mortgage assets and stemming issuer
reliance on covered bonds.

A number of banks, including DNB and pan-Nordic Nordea Bank
AB (NDA), raised mortgage rates this month on anticipation that
stricter rules are unavoidable. The Finance Ministry today also
released a consultation paper outlining four different potential
risk-weight models, ranging from about 20 percent to 35 percent.

Home prices in Western Europe’s biggest oil exporter rose
an annual 8.5 percent last month, according to the Norwegian
Association of Real Estate Agents. Household debt will grow to
more than 200 percent of disposable incomes this year, the
central bank estimates. In the years leading up to Norway’s
1990s property bubble, the debt ratio reached about 150 percent.

Banks in neighboring Sweden must set aside at least 10
percent core Tier 1 capital of risk-weighted assets this year,
with the minimum requirement rising to 12 percent in 2015. Basel
sets a 7 percent minimum by 2019, while the European Banking
Authority has set a temporary 9 percent target for some banks.